Tag: retirement income plan

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Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Looking for a Deferred Fixed Income Annuity on Steroids?

Deferred income annuities (DIAs) have been getting a lot of attention since the Treasury and IRS finalized a regulation in July, 2014 blessing the use of qualified longevity annuity contracts, or “QLACs.” A QLAC is a DIA that’s held in a qualified retirement plan such as a traditional IRA with a lifetime income start date that can begin up to age 85. It’s subject to an investment limitation of the lesser of $125,000 or 25% of one’s retirement plan balance.

Fixed Income Annuity Hierarchy

For individuals concerned about longevity who are looking for a sustainable source of income they can’t outlive, fixed income annuities are an appropriate solution for a portion of a retirement income plan. There are three types to choose from:

  1. Immediate annuities
  2. Deferred income annuities (DIAs)
  3. Fixed index annuities (FIAs) with income riders

The overriding goal when choosing fixed income annuities is to match after-tax income payouts to periodic amounts needed to pay for specified projected expenses using the least amount of funds. Immediate annuities, with a payout that begins one month after purchase date, are appropriate for individuals on the cusp of retirement or who are already retired. DIAs and FIAs with income riders, with their built-in deferred income start dates, are suitable whenever income can be deferred for at least five years, preferably longer.

Assuming there isn’t an immediate need for income, a deferred income strategy is generally the way to go when it comes to fixed income annuities. This includes one or more DIAs or FIAs with income riders. Which should you choose?

DIA Considerations

As a general rule, DIAs and FIAs are both qualified to fulfill the overriding income/expense matching goal. Both offer lifetime income payouts. If your objective is deferred lifetime sustainable income, DIA and FIA with income rider illustrations should be prepared to provide you with an opportunity to compare income payouts.

DIAs can also be purchased for a specified term of months or years. This can be important when there are projected spikes in expenses for a limited period of time.

DIAs may also be favored when used in a nonretirement account since a portion of their income is treated as a nontaxable return of principal. Finally, if you’re looking to defer the income start date beyond the mandatory age of 70-1/2 for a limited portion of a traditional IRA, a QLAC, which is a specialized DIA, may be an appropriate solution.

Let’s suppose that you’re a number of years away from retirement and you’re not sure when you want to retire or how much income you will need each year. A DIA may not be your best choice since you lock in a specified income start date and income payout at the time of investment with most DIAs.

FIA with Income Rider Features

FIAs with income riders hold a distinct advantage over DIAs when it comes to income start date flexibility. Unlike a DIA, there’s no requirement to specify the date that you will begin receiving income when you purchase a FIA.

The longer you hold off on taking income, the larger the periodic payment you will receive. Furthermore, there’s no stipulation that you ever need to take income withdrawals. This is ideal when planning for retirement income needs ten or more years down the road.

For individuals not comfortable with exchanging a lump sum for the promise of a future income stream beginning at a specified date, i.e., a DIA, a FIA with its defined accumulation value and death benefit, offers an attractive alternative assuming similar income payouts. While an optional death benefit feature can be purchased with a DIA to provide a return of premium to one or more beneficiaries prior to the income start date, this will reduce the ongoing income payout amount.

A FIA also has a defined investment, or accumulation, value that equates to a death benefit. Unlike with most DIAs, flexible-premium FIAs offer the ability to make additional investments that will increase income withdrawal amounts in addition to the investment value.

Some FIAs offer a premium bonus that matches a limited percentage, e.g., 5%, of your initial, as well as subsequent, investments for a specified period of time. The accumulation value is also increased by contractually-defined periodic interest credits tied to the performance of selected stock indices.

Finally, a FIA’s accumulation value is reduced by withdrawals and surrender and income rider charges. Any remaining accumulation value is paid to beneficiaries upon the death of the owner(s).

Summary

A comprehensive retirement income plan is a prerequisite for determining the type(s), investment and income payout timing, and investment amounts of fixed income annuities to match after-tax income payouts with projected expense needs assuming that longevity is a concern. If you don’t have an immediate need for income and your objective is lifetime sustainable income, DIA and FIA with income rider illustrations should be prepared to provide you with an opportunity to compare potential income payouts.

With their ability to match a spike in expenses for a limited period of time, term DIAs offer a unique solution. When it comes to lifetime income payouts, FIAs with income riders, with their flexible income start date and accumulation value and associated built-in death benefit, are, in effect, a DIA on steroids.

Given the foregoing advantages and assuming similar income payouts, FIAs with income riders generally offer a more comprehensive solution for fulfilling sustainable lifetime income needs, with the possibility of a larger death benefit. A potential exception would be when investing in a nonretirement account for higher tax bracket individuals subject to one’s preference for a flexible income start date and accumulation value/death benefit in a particular situation.

Last, but not least, all proposed annuity solutions should be subjected to a thorough due diligence review and analysis of individual life insurance companies and products before purchasing any annuity contracts.

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Retirement Income Planning

Can We Still Plan to Retire at a Specific Age?

Keys for planning

Not too long ago it was common for pre-retirees to depend on two sources of retirement income: Social Security and a private or public pension. Both began at age 65, were expected to last for life, and typically met 50% or more of retirees’ financial needs.

With two secure sources of lifetime income, age 65 was the standard retirement age for many years. Retirement income planning focused on closing or narrowing the gap between one’s projected retirement income needs and what would be provided by Social Security and pension income.

Retirement Planning Milestone

The decline of defined benefit pension plans over the past 30 years eliminated one source of dependable lifetime income for most retirees. The replacement of these plans with 401(k) defined contribution plans was a milestone in the retirement planning world since it transferred the responsibility for funding retirement from employers to employees.

Retirement income planning has dramatically increased in importance in recent years as employees have realized that it isn’t easy to (a) accumulate sufficient assets in 401(k) plans to generate adequate retirement income and (b) convert 401(k) plan assets into sustainable lifetime income streams beginning at a specified age.

The shift from employer defined benefit to employee defined contribution retirement plans, combined with longer life expectancies, has made it much more challenging to plan for retirement at a specific age. While it’s definitely possible, it requires a different mindset and the assistance of an experienced retirement income planning professional to increase one’s opportunity for success.

Retirement Income Plan is Essential

As part of the change in mindset, it’s important to understand and recognize that a retirement income plan is an essential tool for helping individuals close or reduce the gap between projected retirement income needs and what will be provided by one source of sustainable lifetime income in many cases, i.e., Social Security. Unlike other types of financial plans, a retirement income plan typically isn’t a “one-and-done” exercise.

A successful retirement income plan generally requires an ongoing disciplined, systematic, approach beginning at least 20 years prior to retirement and continuing for the duration of retirement. The purpose of such a plan should be to make sure that sufficient assets will be saved at specified times using tax-advantaged investment and protection strategies that will increase the likelihood of providing adequate and reliable after-tax income to cover one’s planned and unplanned expenses beginning at a specified age for the duration of retirement.

With the shift from employer to employee retirement funding, can we still plan to retire at a specific age? I believe that it’s possible provided that we understand (a) the burden for making this a reality has shifted from employers to employees, (b) a retirement income plan beginning at least 20 years prior to retirement in most situations is essential, and (c) a lifetime commitment is required to monitor and update the plan in order to reduce the risk of outliving one’s assets.

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Deferred Income Annuities Longevity Insurance Qualified Longevity Annuity Contract (QLAC) Retirement Income Planning

Don’t Expect to See QLAC’s Soon

One of the most exciting retirement income planning opportunities since the elimination of the Roth IRA conversion income threshold in 2010 has been approved, however, it isn’t available yet for purchase.

For those of you who may not be familiar with the change in Roth IRA conversion eligibility rules, prior to 2010, only taxpayers with modified adjusted gross income of less than $100,000 were eligible to convert a traditional IRA to a Roth IRA. With the elimination of the income threshold, Roth IRA conversions have soared in popularity since anyone may convert part, or all, of his/her traditional IRA to a Roth IRA. See Year of the Conversion to learn more.

The most recent potential retirement income planning game-changer, qualified longevity annuity contracts, or “QLAC’s,” have received a fair amount of press since the Treasury and IRS finalized a regulation in the beginning of July blessing their use. I have personally written two other articles about them, beginning with 6 Ways a New Tax Law Benefits a Sustainable Retirement published July 25th in the RetireMentors section of MarketWatch and my August 4th Retirement Income Visions™ blog post, You Don’t Have to Wait Until 85 to Receive Your Annuity Payments.

What are QLAC’s?

QLAC’s came about in response to increasing life expectancies and the associated fear of outliving one’s assets. With the passage of IRS’ final regulation, retirement plan participants can now invest up to the lesser of $125,000 or 25% of their retirement plan balance in specially-designated deferred income annuities, or “DIA’s,” that provide that lifetime distributions begin at a specified date no later than age 85. Unlike single premium immediate annuities, or “SPIA’s,” that begin distributing their income immediately after investment, the start date for DIA income payments is deferred for at least 12 months after the date of purchase.

As discussed in my July 25th MarketWatch article, QLAC’s offer a new planning opportunity to longevitize your retirement in six different ways. While longevity is the driving force for QLAC’s, the income tax planning angle, which is the first possibility, has been attracting the lion’s share of media attention. Specifically, QLAC’s provide retirement plan participants with the ability to circumvent the required minimum distribution, or “RMD,” rules for a portion of their retirement plan assets. These rules require individuals to take annual minimum distributions from their retirement plans beginning by April 1st of the year following the year that they turn 70-1/2.

Where Do I Buy a QLAC?

I’ve had several people ask me recently, “Where do I buy a QLAC?” Unlike the Roth IRA conversion opportunity that expanded the availability of an existing planning strategy from a limited audience to anyone who owns a traditional IRA with the elimination of the $100,000 income barrier beginning on a specified date, i.e., January 1, 2010, the implementation of IRS’ QLAC regulation is much more complicated. This is resulting in an unknown introduction date for QLAC offerings.

There are several reasons for this, not the least of which is the nature of the product itself. First and foremost, although an existing product, i.e., a deferred income annuity, or “DIA,” will initially be used as the funding mechanism for QLAC’s, the contracts for DIA’s that are currently available don’t necessarily comply with all of the various provisions of IRS’ new QLAC regulation. While the three mentioned are the most important, i.e., (1) Only available for use in retirement plans, (2) limitation of lesser of $125,000 or 25% of retirement plan balance, and (3) distributions must begin at a specified date no later than age 85, there are other technical requirements that must be met in order for a DIA to be marketed and sold as a QLAC.

In addition to understanding and complying with the nuances of the IRS regulation, life insurance carriers that want to offer QLAC’s are scrambling to restructure existing DIA products and develop new products that will (a) match consumers’ needs, (b) be competitive, and (c) meet profit objectives. This requires a host of system and other internal changes, state insurance department approvals, and coordination with distribution channels, all of which must occur before life insurance companies will receive their first premiums from sales of this product.

Another important obstacle to the introduction of QLAC’s is the fact that fixed income annuities with deferred income start dates, including DIA’s and fixed index annuities, or “FIA’s,” with income riders, are a relatively new product to which many consumers haven’t been exposed. While both products are designed, and are suitable, for use in retirement income plans, most investment advisors don’t currently have the specialized education, licensing, and experience to understand, let alone offer, these solutions to their clients. See What Tools Does Your Financial Advisor Have in His or Her Toolbox?

So when will you be able to purchase QLAC’s? Although current speculation is that product launch may begin in the fourth quarter of this year, it’s my personal opinion that widespread availability will not occur until well into 2015. This will give investment advisers and consumers, alike, additional time to get more educated about fixed income annuities, including their place in retirement income plans. Once the word spreads, I believe that the demand for fixed income annuities will increase significantly, especially if the timing is preceded by a stock market decline.

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Retirement Income Planning

What is Your Planned Retirement Trigger?

A metal toggle switch with plate reading On and Off, flipped in the On position

The introduction to one of my recent MarketWatch RetireMentors columns, You Need a Plan to Retire Before You Plan to Retire, stated the following fact of which most people aren’t aware:

“You’re not going to retire when you plan on retiring. You’re probably going to retire earlier.”

The article cited results of two recent well-known and respected annual studies that demonstrated that there’s a good chance that you will retire before you expect to do so.

The Employee Benefit Research Institute (EBRI) Retirement Confidence Survey has consistently shown an increasing trend in the percentage of people retiring earlier than planned since 2007. Per the 2014 survey, 49% of people retired earlier than planned, 38% retired about when planned, and only 7% retired later than planned.

Results of the Gallup 2014 Average Actual vs. Expected Retirement Age Survey for the last 13 years have found that the average expected retirement age among non-retirees has consistently exceeded the average actual retirement age among retirees by four to seven years. 2014 was no exception when the average expected retirement age among non-retirees was 66 vs. average actual retirement age among retirees of 62.

Why did 49% of people surveyed by EBRI leave the workforce earlier than planned? While some retirees gave positive reasons for retiring early, many cited negative reasons for doing so. The top three were as follows:

  • Health problems or disabilities (61%)
  • Changes at companies, such as downsizing or closure (18%)
  • Having to care for spouses or other family members (18%)

Why Plan for a Specific Retirement Age?

As emphasized in several of my posts, including the last one, Do You Want to RAP or Do You Prefer to RIP?, retirement planning is unquestionably the most difficult type of goal-oriented financial planning. Knowing that there’s a 50% chance that you will retire earlier than expected, often for reasons beyond your control, and that the average actual retirement age among retirees is 62, why bother planning to retire at a specific age?

While you may retire earlier or later than planned, that’s no different than other types of financial planning where actual results are generally different from those that were planned. Furthermore, this knowledge doesn’t negate the need for planning, especially when it comes to retirement income planning where the fear of running out of money can cause many sleepless nights without proper planning. If anything, it emphasizes the importance of having a retirement income trigger, or age at which you would like to retire, and reinforcing your plan by including a premature retirement strategy.

Increase Your Odds for Success

You don’t have to be average. If you want to improve the likelihood of retiring at your planned retirement age, consider working with a financial adviser if you aren’t doing so already. As pointed out in my July 11, 2013 MarketWatch RetireMentors article, Retire Confidently With a Written Plan, the value of working with a financial adviser and having a written retirement income plan is reinforced by the numbers of individuals who retire voluntarily versus involuntarily.

Citing the results of the 2013 Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, the article stated that 74% of those currently working with an adviser retired by choice. In addition, per the survey, only 18% of those working with an adviser expected running out of money to be their top concern during retirement.

Three Questions to Ask Yourself

If you’re planning for retirement, here are three questions you should ask yourself:

  • What is your planned retirement trigger?
  • Do you have a written retirement income plan for your trigger?
  • Are you working with a financial advisor who specializes in retirement income planning?
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Retirement Income Planning

The Retirement Income Planning Disconnect

tug of war between husband and wife

When I began writing and publishing Retirement Income Visions™ almost five years ago, retirement income planning was a relatively new concept. What people thought was retirement income planning turned out to be traditional retirement asset planning in most cases.

While the distinction between retirement income and retirement asset planning has gotten more attention in the media over the last five years and has come to the forefront for financial advisors with The American College’s establishment of the Retirement Income Certified Professional® (RICP®) designation two years ago, the importance of implementing a retirement income plan hasn’t caught on yet with most pre-retirees.

According to a TIAA-CREF survey, 72 percent of retirement plan participants said that either their plan didn’t have a lifetime income option or they weren’t sure if their plan offered one. While 28 percent said that their plan offered a lifetime income option, only 18 percent of plan participants actually allocated funds to this choice.

This is despite the fact that 34 percent of retirement plan participants surveyed said that the primary goal for their plan is to have guaranteed money every month to cover living costs and another 40 percent wanted to make sure that their savings are safe no matter what happens in the market. Furthermore, while 74% are concerned about security of their investments, only 21 percent expect to receive income from annuities.

Given the fact that fixed income annuities are the only investment that’s designed to provide guaranteed lifetime income, there’s an obvious disconnect and associated lack of understanding between what pre-retirees want and what they’re implementing when it comes to retirement planning. A large part of the problem is attributable to the fact that employees are relying too much on their employer’s retirement plan to meet their retirement needs. See Don’t Depend on Your Employer for Retirement.

Most employers today offer a 401(k), or defined contribution plan, to their employees vs. the traditional defined benefit plan that was prevalent several years ago. The latter plan is designed to provide lifetime income beginning at a defined age whereas a 401(k) plan is designed to accumulate assets, the value of which fluctuates over time depending upon market performance.

Since an income tax deduction is available for contributing to a non-Roth 401(k) plan and the maximum allowable contribution level is fairly generous for most employees, the incentive to seek out lifetime income options in the marketplace is limited for most retirement plan participants. This is the case even though people like the idea of lifetime income and their employer’s retirement plan doesn’t usually offer this option.

As the marketplace becomes better educated about the importance of having a retirement income plan, this is reinforced by the next stock market downturn, and employers increase the availability of lifetime income options, the disconnect between the desire for, and inclusion of, sustainable lifetime income in one’s plan will lessen over time.

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Annuities Fixed Index Annuities Retirement Income Planning

How Flexible are Flexible Premium Deferred Annuities?

When planning for retirement, you need to generate sustainable income that will meet your projected inflation-adjusted financial needs during various stages. This often requires multiple income-generating sources that ideally start, and potentially stop, to match your projected needs at different stages of retirement.

A diversified portfolio of fixed income investments that’s part of your overall portfolio generally needs to be designed to provide the desired after-tax income amounts and timing of same. The planning is complicated, should begin well in advance of retirement, and needs to be monitored and updated on a regular basis.

One popular investment that’s designed for the fixed income portion of a retirement income plan is a fixed index annuity (“FIA”) with an income rider. When you invest in a FIA, you’re purchasing a deferred annuity. As defined in the Glossary, a deferred annuity is an annuity that doesn’t mature or begin making payments until some future date.

Deferred Annuity Types

There are two types of deferred annuities, both of which are suitable for inclusion in a retirement income plan: (a) single premium deferred annuity (“SPDA”) and (b) flexible premium deferred annuity (“FPDA”). The basic difference between the two is the allowable investment frequency. A SPDA is a one-time investment whereas a FPDA provides for multiple investments in the same annuity.

The key to understanding FPDA’s, including how they will fit into a particular retirement income plan, is that flexibility is in the eye of the beholder, or, in this case, the insurance carrier that issues a particular product. While a FPDA by definition allows for multiple premiums, the number of years the additional premiums may be added and/or the premium amounts are often limited by the terms of an annuity contract. This can be problematic where ongoing investments of specific amounts are required to achieve a targeted level of retirement income.

Types of Flexibility Restrictions

While many FPDA’s provide for indefinite additional investments, several have a limited defined window of opportunity. To give you an idea of the possibilities, let’s take a look at the FIA offerings available through the life insurance agency with which I’m associated.

Of the 52 FIA’s currently offered by 14 carriers, all of which are highly rated, 25 are SPDA’s and 27, or 52%, are FPDA’s. 16 of the 27, or 59%, of the FPDA’s have no restrictions regarding the number of years additional premiums may be added or the amounts of same.

That leaves 11 FPDA’s with restrictions, seven of which limit the number of years that additional premiums may be added and four limit the additional premium amount. The seven FPDA’s that limit the number of years uses either one or three years as the limitation. The four that limit the premium amount are all offered by the same carrier which limits additional premiums to $25,000 per year.

Retirement income planning requires flexibility. The ability to make unlimited additional investments after the first contract year without restriction as to dollar amount is an important consideration in many cases when evaluating FIA’s with income riders. In summary, the type of fixed income annuity and product that you’re evaluating needs to dovetail with your projected financial needs to increase your opportunity for success.

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Retirement Income Planning

It’s All About Timing

No matter how many times we see magic shows, inevitably, in response to a professionally-performed magic trick, we blurt out, “How did he do that?” Even though we know that the magician’s goal is to elicit this reaction, we’re nonetheless amazed by it.

What’s more astounding is that we’re amazed despite the fact that we all know the secret to each and every trick – timing. The use of precise timing in the performance of a planned sequence of events is responsible for creating the illusion that’s played out before our eyes time and time again by a professional magician.

It’s no different when it comes to successful retirement income planning. It’s all about timing. Anyone can stop working permanently and say they’re retired. Successful financial retirement, however, requires the performance of a planned sequence of events before and throughout retirement.

As you may have noticed, unlike my description of the magic process, I omitted the word “precise” before “planned sequence of events.” This was intentional since, unlike magic where the magician has control over the outcome of his tricks provided his timing is precise, this is irrelevant when it comes to retirement income planning. There are too many variables beyond our control, e.g., longevity, inflation, etc., that affect the outcome of a retirement income plan, making the use of precise timing meaningless.

Nonetheless, the performance of a planned sequence of events in a timely manner is essential to increasing the likelihood of a successful financial retirement. It’s a complicated ongoing process that requires planning, managing, and protecting retirement income. Given the potential duration of retirement of up to 25+ years, the sooner the process is begun, the more likelihood of a successful result.

As a retirement income planner, my ability to perform “magic” for a client is dependent upon my ability to understand my client’s financial needs and my client’s willingness to allow me to implement and maintain a plan that includes the performance of a planned sequence of events that will increase the likeliness of my client meeting his/her financial needs throughout retirement. Timing is everything.

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Retirement Asset Planning Retirement Income Planning

Don’t Plan to Squeak By Into Retirement

Let’s face it. We’re a “just in time” society. With our busy lives, we do a lot of things at the last minute. Many people thrive on the adrenaline rush that often accompanies completion of a project right before its deadline.

Retirement income planning lesson #1: Don’t plan to squeak by into retirement. We simply cannot apply our “just in time” thinking to retirement. Retirement income planning is complicated, with too many things that can go wrong, many of them beyond our control. It requires a totally different mindset that runs contrary to the way most of us are use to thinking.

While there are no guarantees, a retirement income plan that’s begun and frequently revisited well before and throughout retirement provides the best opportunity for success. The basic goal of any retirement income plan is for your money to outlive you. When you see headlines like “Boomers’ Retirement Confidence Sinks,” you know this isn’t an easy goal to achieve.

Retirement income planning is especially tricky. It is quite different from retirement planning where the primary objective is accumulation of assets to obtain financial security throughout one’s retirement years. Traditional retirement planning isn’t enough to get you to the finish line in most cases today.

It’s too easy to have a false sense of comfort that one’s accumulated assets are sufficient to last for the duration of retirement only to be unpleasantly blindsided by the “sequence of returns” in the first several years of retirement. For those of you who aren’t familiar with this term, it is a series of investment portfolio returns, usually expressed annually, that has a direct impact on the longevity of an investment portfolio during the withdrawal stage. See The Sequence of Returns – The Roulette Wheel of Retirement that includes a comparison of three scenarios to help you better understand the importance of this risk to a retirement asset plan.

Retirement income planning takes retirement planning a step further. It requires planning for a predictable income stream from one’s assets, that when combined with other sources of income, is designed to meet an individual’s or family’s financial needs for the duration of retirement. This is a very important distinction. Locking in a predictable income stream in advance of one’s retirement reduces the impact of a down market in the early years of retirement.

A retirement income plan needs to have a secure floor of retirement income that will last for your, and, if applicable, your spouse’s lifetime. The timing and after-tax amount of the floor needs to correspond to ongoing and one-time predictable and unpredictable expenses that will fluctuate during different periods of retirement adjusted for inflation. To the extent that known income streams, e.g., Social Security, aren’t projected to be sufficient to cover expense needs, other sources of sustainable income need to be developed well in advance of retirement.

Don’t plan to squeak by into retirement. Trust me – there won’t be any adrenaline rush.

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Annuities Fixed Index Annuities

With a Fixed Index Annuity, You Can Have Your Cake and Eat It Too

Beginning with the August 1, 2011 post, Do You Want to Limit Your Potential Gains? through the November 5, 2012 post, Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4, there were a total of 58 posts about fixed index annuities (“FIA’s”). Not to state the obvious, however, that’s a lot of information about one subject!

The impetus for the volume of material on FIA’s was, and continues to be, the fact that a FIA with an income rider is a unique and underutilized strategy that can provide a meaningful lifetime income floor for many retirement income plans while protecting against downside risk. As evidence of this fact, fixed index annuity sales have been increasing at a rapid pace the last two years while sales of variable annuities have been on the decline. Furthermore, their use as a retirement income planning tool is affirmed by the fact that the majority of sales have included an optional income rider.

What’s so special about a FIA? In one word – flexibility. A FIA is the only fixed annuity where you can receive a stream of income and also enjoy an investment value — that comes with downside protection. The other two types of fixed annuities, i.e., single premium immediate annuities (“SPIA’s”) and deferred income annuities (“DIA’s”) fulfill the income role (immediate in the case of SPIA’s and deferred with DIA’s), however, neither one of these two vehicles has an investment value. In addition, the lifetime income stream from a DIA often isn’t as competitive as lifetime payments from a FIA income rider with the same deferral period.

Another example of the flexibility associated with FIA’s is the income start date. Unlike a DIA where there’s a contractual fixed start date, the commencement of lifetime income from a FIA is totally flexible. It can typically be turned on at any time beginning one year after the contract date. Furthermore, while the lifetime income amount generally increases the longer you defer the start date, there’s no requirement to ever begin taking income withdrawals.

While SPIA’s and lifetime DIA’s (there are also period certain, or fixed term, DIA’s), are both designed to protect against the risk of longevity, the fact of the matter is that premature death can reduce their value, in some cases significantly. Some DIA’s can be purchased with a death benefit to protect against the possibility of death prior to their deferred annuitization date, however, the added insurance protection often increases the required investment amount, all else being equal.

When FIA’s are purchased with an optional income rider, it’s usually done in conjunction with some type of retirement income planning. As such, the emphasis is on deferred lifetime income, with the investment, or accumulation, value playing a secondary role. The fact of the matter is that the investment value is the anchor that provides the following four important benefits in addition to the sustainable lifetime income from the income rider:

  • Principal protection
  • Minimum guarantees
  • Upside interest potential
  • Death benefit

Assuming that no withdrawals are taken from the accumulation value in addition to income rider distributions, the accumulation value will only decrease by the income rider charge prior to turning on the income stream. Given this fact, unlike SPIA’s and lifetime DIA’s, FIA’s will have a death benefit available from day 1 that continues for much of the life of the FIA.

Once income begins, the accumulation value, i.e., death benefit, will decrease by the amount of income withdrawals in addition to the income rider charge. An optional death benefit rider can be added to the contract at the time of purchase to provide a guaranteed death benefit that will be paid even if there’s no accumulation value.

A fixed index annuity with an income rider is truly a unique retirement income planning tool. Unlike other types of fixed annuities where income begins immediately, i.e., SPIA’s, or at a contractually fixed date in the future, i.e., DIA’s, a FIA income start date is totally flexible. In addition, unlike SPIA’s and DIA’s which are only about lifetime income, FIA’s include an investment value. Furthermore, the investment value has built-in downside protection. Who said you can’t have your cake and eat it too?

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Retirement Income Planning

Plan for a Range of Retirement Ages

It’s widely agreed that age 65 is no longer the magic retirement age. According to the U.S. Bureau of the Census Current Population Survey, 65 or 66 was the average retirement age for men from the early 60’s through the mid 70’s. It dropped to age 64 in the late 70’s, 63 in the 80’s, and 62 from 1989 until 1995. It then increased to 63 from 1997 through 2007 before it returned to age 64 in 2009.

The average retirement age for women has historically been younger than for men. There was a 6 to 13-year age difference from the early 60’s through the mid 80’s when the average age for women ranged from 53 to 57. It wasn’t until 1989 that the average retirement age for women climbed to 59, then 60 in 1995, 61 in 2003, and 62 in 2007. Since 1989, the spread between men and women’s average retirement age has held steady between two and three years.

You may be thinking, that’s pretty good – men are retiring at age 64 and women at 62. There are several things to keep in mind, however, when digesting these statistics:

  • These are average ages, with 50% of individuals retiring at a later age.
  • When someone retires, it isn’t always by choice and instead is often dictated by layoffs or health issues.
  • Most people who retire don’t have a retirement income plan with multiple potential sources of sustainable income.
  • Many people who retire do so with minimal income with a reduced lifestyle compared to what they previously enjoyed.
  • The absence of a retirement income protection plan, including long-term care protection, is common.
  • With longer life expectancies, it’s becoming more challenging to not outlive your financial resources.

With traditional pension plans becoming rarer in the private sector, increasing starting age for collecting full Social Security benefits as well as other anticipated unfavorable changes to the Social Security system, the average retirement age for men and women is likely to continue its climb. Given this situation, planning to retire at age 65 isn’t realistic for most people.

Assuming that you want to do retirement income planning, what is the retirement age for which you should plan? I’m a firm believer, for many reasons which are beyond the scope of this post, that retirement income planning, more so than any other type of financial planning, needs to be dynamic and flexible. It’s important that you don’t pigeon hole yourself into one specific age and instead plan for a range of possible retirement ages. A five-year range is generally appropriate, e.g., 64 to 68. In addition, this isn’t a one-time exercise. It should be reviewed and adjusted on a regular basis, preferably annually.

Don’t be guided and mislead by statistics. There’s no magic age at which you should retire. If you haven’t done so already, you need to hire a professional retirement income planner to assist you with the analysis and recommendations. You don’t want to make a mistake when it comes to calculating your ability to retire at a certain age since you probably won’t get a second chance once you retire.

Categories
Long-Term Care Longevity Insurance

The Retirement Income Planning Sweet Spot

Retirement Income Center

If you know me professionally, you know that I’m big on distinguishing between retirement income, vs. retirement asset, planning. This isn’t about semantics. It’s about being practical. Unless your lifestyle allows you to survive solely on Social Security or a comparable monthly benefit if you don’t qualify for Social Security, you need to create your own pension. This is, after all, the theme of this blog: Innovative strategies for creating and optimizing retirement income.

In order to create your own pension, you need assets. The question is, when should you transition from a retirement asset planning to a retirement income planning approach? Tied into this question is a related question: Is your current financial advisor trained, experienced, and equipped to offer solutions to assist you with making this change? If not, it may be time to look for a new adviser who specializes in retirement income planning.

See What Tools Does Your Financial Advisor Have in His or Her Toolbox

So when should you begin creating your own pension? This is a daunting task since the primary goal is to ensure that you won’t outlive your income while surrounded by many unknowns, including, how long you will live, potential health issues and timing and cost of same, as well as changing inflation and tax rates, to name a few. Given this situation, there ideally needs to be a significant amount of lead time to do the necessary planning.

As with all financial planning goals, you need to work backwards from your target date. By definition, the applicable date for retirement income planning would be the age at which you would like to retire. Given the complexity of the process together with the many unknowns, a 20-year lead time is generally advised. Assuming that you would like to retire at age 70, you should have an initial retirement income plan prepared at age 50.

This doesn’t mean that you need to transfer all of your nonretirement and retirement investment assets into income-producing assets on your 50th birthday. This is simply when the transition from a retirement asset planning to a retirement income planning process should begin. Strategies will generally be implemented gradually over the course of the years leading up to, as well as after, retirement as your situation changes and different opportunities present themselves. Your retirement income plan needs to be vibrant, proactive, and responsive to change since you will experience many of them at an increasing rate as you approach, and move into, your retirement years.

In addition to retirement income planning strategies, your plan should include income protection strategies for yourself and for your spouse if married. An unprotected, or under protected, life event such as disability, long-term care, or death can severely reduce the longevity of, and potentially prematurely deplete, your, or your survivor’s, investment assets. Income protection strategies should be included and implemented as part of an initial retirement income plan due to the fact that they become increasingly expensive and potentially cost prohibitive with age, not to mention the risk of being uninsurable as you get older.

So what if you’re within 20 years of retirement and you haven’t begun retirement income planning? No need to panic. While your strategies and potential opportunities may be more limited depending upon how close to retirement you are, it’s never too late to start a retirement income plan. As previously stated, retirement income planning strategies are generally implemented both before and during retirement as your situation changes and different opportunities present themselves.

Categories
Social Security

Approaching 62? – Stop Before You Leap – Part 1 of 2

As I’ve dealt with clients and nonclients alike over the last three decades, one of my ongoing observations is the lack of formal and informal financial education we receive as a society when it comes to how to recognize and plan for critical life-changing financial events in our lives. This is especially true as it pertains to one of the most, if not the most, important financial decisions most of us will make during our lifetime, i.e., when to begin receiving Social Security retirement benefits.

By way of background, although you may apply to begin receiving Social Security retirement benefits at age 62, your benefit will increase each month that you defer your start date until age 70. While it’s tempting to turn on the faucet at age 62, this may not be the best age to begin receiving benefits if you’re concerned about maximizing and prolonging your retirement income stream and that of your spouse if you’re married.

The timing of the Social Security claiming age decision occurs at the crossroads of most peoples lives when many decisions need to be made that will affect the financial and emotional success of one’re retirement years. It comes at a time when:

  • The financial and psychological security of full-time employment will be ending in the near future for most people.
  • The sequence of investment returns can make or break one’s retirement if not properly planned for.
  • There will be a prolonged period of financial uncertainty without the associated safety of a paycheck, including unknown investment performance, inflation, and income tax rates.
  • Health begins to decline for many people with escalating health insurance premiums, potential higher out-of-pocket medical costs, and potential uncovered long-term care expense.

Given the far-reaching and long-term consequences of the Social Security claiming decision, it should be a high priority for anyone approaching age 62 to have a professional retirement income planner prepare an analysis as part of a retirement income plan to determine the optimal age to begin receiving Social Security retirement benefits.

The choice of a Social Security starting age will differ depending upon each person’s unique circumstances. This will become more evident when you read the reasons why the choice of your Social Security claiming age is so important in Part 2 of this post next week.

Categories
Annuities Fixed Index Annuities Retirement Income Planning

Retirement Income Planner Key to Success When Investing in Fixed Index Annuities

Last week’s post presented a list of 12 questions you should ask yourself when considering the purchase of fixed index annuities (“FIA’s”). As evidenced by the questions, themselves, as well as the number of questions, this is a very technical area that requires specialized expertise.

So where do you find answers to the various questions? Assuming that investment in one or more FIA’s makes sense in your financial situation, where should you go to purchase these long-term investments? The remainder of this post will assume that you’re considering FIA’s in the context of a retirement income plan.

Unlike investing in the stock market, where you can utilize the services of an investment manager or be a do-it-yourselfer, you must purchase fixed index annuities from a licensed life insurance agent who has the requisite training to sell annuities. Life insurance agents can sell different types of insurance products, including life, disability, and long-term care insurance, as well as annuities. Life insurance companies, life insurance agents, types of products, and the specific products that can be sold, are regulated by an insurance body in each state.

Not every life insurance agent sells annuities. Some only sell variable annuities. Furthermore, there are several different types of fixed annuities, including single premium deferred annuities (“SPDA’s”), single premium immediate annuities (“SPIA’s), deferred income annuities (“DIA’s), and FIA’s. FIA’s are a unique type of fixed annuity that requires specialized expertise and training, and, as such, aren’t offered by every life insurance agent who sells fixed annuities.

Since a FIA is a unique long-term investment with several moving parts in the base product as well as the income rider that change on a regular basis in response to market conditions, it’s important to work with an independent life insurance agent who has access to at least two dozen FIA’s offered by at least six different highly-rated life insurance companies, and sells them on a regular basis.

Going beyond locating a life insurance agent who (a) sells annuities, (b) sells fixed annuities, (c) sells FIA’s, and (d) is an independent agent with access to several different FIA’s offered by several different highly-rated life insurance companies, there are other considerations to keep in mind before purchasing a FIA. First and foremost, you need to recognize and understand the fact that retirement income planning is a specialized discipline, it’s complicated, there are many risks that need to be considered, and mistakes can be costly.

Given the fact that the purchase of a FIA with an income rider for retirement income planning purposes is typically a lifetime investment that often requires a large upfront financial commitment and potentially ongoing periodic investments, it’s especially important that you work with the right individual. Specifically, the person you choose should be a professional retirement income planner. What exactly is a retirement income planner? Sounds like the subject of another post.

Categories
Annuities Fixed Index Annuities

12 Questions When Considering Fixed Index Annuities

It’s hard to believe, however, it’s been over a year since I began writing about fixed index annuities, or “FIA’s”, as a retirement income planning strategy. Beginning with the July 11, 2011 post, Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, this has been the subject matter of virtually every Retirement Income Visions™ weekly post. Several of the posts, including the last nine, have been organized into multi-part series.

As evidenced by the titles of many of the posts as well as the number of parts in the various series, this is a highly technical area. Not to mention that there are currently 251 products offered by 40 life insurance companies to choose from.

The following is a list of 12 questions you should ask yourself when considering the purchase of fixed index annuities:

  • Are fixed index annuities suitable for me?
  • How will they fit into my retirement income plan?
  • Should they be part of my nonretirement or retirement investments?
  • What are the current and future income tax consequences?
  • Should I purchase an income rider?
  • When should I begin to purchase fixed index annuities?
  • How much should I invest in fixed index annuities?
  • Should I make ongoing investments in addition to my initial investment?
  • When should I begin to take income withdrawals?
  • Which indexing methods should I choose?
  • Should I consider products that offer a premium bonus?
  • Which product(s) is (are) best for me?

As you can appreciate, these aren’t easy questions to answer individually, let alone collectively. Next week’s post will provide you with guidance regarding how to go about finding answers to each of these questions.

Categories
Annuities Celebration Fixed Index Annuities Retirement Income Planning

Retirement Income Visions Celebrates 3-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its three-year anniversary. Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post on August 16, 2009, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Just ask anyone who retired just prior to, or during, this period that didn’t have a retirement income plan in place when he/she retired.

With increasing life expectancies, record-low interest rates, traditional pension plans going by the wayside, soaring health and long-term care costs, and the potential for inflation, retirement income planning is no longer an option. It has become a necessity for anyone who wants to ensure that he/she will have sufficient income to meet his/her expenses for the duration of retirement. Recognizing this fact, The American College launched its Retirement Income Certified Professional™ (RICP™) program earlier this year in which I was one of the first enrollees.

Since its inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 137 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

While the first two years of Retirement Income Visions™ presented a variety of retirement income planning strategies, fixed index annuities, or “FIA’s,” have been the sole focus of virtually every weekly post for the past 13 months. Continuing a theme that began on July 11, 2011 during the second year of publication with Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, the inner workings of FIA’s, including their unique benefits as a retirement income planning solution, has been discussed in detail. As a result, Retirement Income Visions™ has become an authoritative source of information on this important and timely topic.

Although FIA’s has been the theme of almost every post for over a year, the posts have been organized by a number of sub-themes. Following the July 11, 2011 post, the introduction to the FIA strategy continued with the next five posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities (July 18, 2011), Limit Your Losses to Zero (July 25, 2011), Do You Want to Limit Your Potential Gains? (August 1, 2011), When is the Best Time to Invest in Indexed Annuities? (August 8, 2011), and How Does Your Fixed Index Annuity Grow? (August 22, 2011).

The next twelve posts, beginning with the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth, through the November 14, 2011 post, How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines, presented a thorough discussion of the various traditional fixed index annuity indexing strategies. This included an introduction to, and comparison of, the following indexing methods: annual point-to-point, monthly point-to-point, monthly average, trigger indexing, inverse performance trigger indexing, as well as the fixed account that’s included as one of the strategy choices by virtually every FIA.

Moving beyond the base product, the subject of the next nine posts was an introduction to the income rider that’s offered by many FIA’s. The income, or guaranteed minimum withdrawal benefit (“GMWB”), rider is the mechanism for providing guaranteed (subject to the claims-paying ability of individual life insurance companies) lifetime income with a flexible start date that is essential to so many retirement income plans. This kicked off with the enlightening December 5, 2011 and December 12, 2011 posts, No Pension? Create Your Own and Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck. The introduction to income rider series also included two two-part series, Your Fixed Index Annuity Income Rider – What You Don’t Receive (December 19, 2011 and December 26, 2011) and 5 Things You Receive From a Fixed Index Annuity Income Rider (January 9, 2012 and January 16, 2012).

Following two posts introducing fixed index annuity income calculation variables on January 23, 2012 and January 30, 2012 (10 Fixed Index Annuity Income Calculation Variables and Contractual vs. Situation Fixed Index Annuity Income Calculation Variables), a five-part series ensued revolving around a topic often misunderstood by the general public — premium bonuses. The posts in this series included 8 Questions to Ask Yourself When Analyzing Premium Bonuses (February 6, 2012), What’s a Reasonable Premium Bonus Percentage? (February 13, 2012), How Will a Premium Bonus Affect a Fixed Index Annuity’s Value? (February 20, 2012), How Will Withdrawals Affect Your Premium Bonus? (February 27, 2012), and How Will a Premium Bonus Affect Your Fixed Index Annuity Income Distribution? (March 5, 2012).

The next five posts delved into the inner workings behind the variables and interaction of variables behind the calculation of income withdrawal amounts from FIA income riders. This included the following posts: Income Account Value vs. Accumulation Value – What’s the Difference? (March 19, 2012), How is Your Fixed Index Annuity’s Income Account Value Calculated? (April 2, 2012), How Much Income Will You Receive From Your Fixed Index Annuity? (April 9, 2012), and a two-part series, Don’t Be Fooled by Interest Rates – It’s a Package Deal (April 16, 2012 and April 23, 2012).

When Should You Begin Your Lifetime Retirement Payout? was the subject of a two-part series (May 7, 2012 and May 14, 2012) followed by another timing question, When Should You Begin Investing in Income Rider Fixed Index Annuities? (May 21, 2012).

The May 28, 2012 through June 18, 2012 four-part series, Fixed Index Annuity Income Rider Similarities to Social Security, was a well-received and timely topic. This was followed by a second five-part comparison series beginning on June 25, 2012 and continuing through July 23, 2012, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The last two weeks’ posts have addressed the topic of valuation of a FIA’s income rider stream. This included the July 30, 2012 post, What is the Real Value of Your Fixed Index Annuity, and the August 6, 2012 post, Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?.

As I did in my August 9, 2010 and August 15, 2011 “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, thank you to Nira, my incredible wife, for her enduring support of my blog writing and other professional activities.